Gordon Campbell on the end game for The
Hobbit

The two main issues that will decide
Warners’ decision about where to shoot The Hobbit
are both inching towards a resolution. Neither involve the
actors’ union dispute which has always been a sideshow –
mainly because the cost of reaching a compromise deal on
wages and conditions would be chump change for Hollywood.
The two factors that matter are (a) the production
incentives available in New Zealand compared to elsewhere in
the world. This is what Philippa Boyens means when she says
Warners are‘ running the numbers” on the five or six
locations now in the running for the location shoot and (b)
the late intrusion of the 74 year old corporate raider Carl
Icahn into the sale of debt-burdened MGM, which owns a major
stake in The Hobbit project.

As I’ll explain
below, Icahn will not be able to derail what is now a done
deal between MGM and Spyglass, but he seems to be delaying
the announcement of the MGM sale, and the subsequent
greenlight for The Hobbit. The rate at which Icahn
has been buying up MGM’s senior debt means that it will
cost an arm and a leg for Spyglass and the re-constituted
MGM to buy him out, which will in turn make those production
incentives even more important than they are already. New
Zealand stands to lose in any strict number crunching of the
incentive money it can put on the table – because the Key
government has allowed our global competitiveness to fall
behind other countries, and we may be about to pay the price
for that complacency.

Even so, a lot of the emotion needs
to be taken out of the issue. The rhetoric of New Zealand
“losing” The Hobbit has always been overheated.
All along, what we have stood to lose was only the location
shoot. The pre-production work is already under way at local
work-shops in Miramar and similarly, the highly remunerative
post-production work was always going to be done at Weta
Digital.

Yes, it would be nice to do the location shoot
here as well. But get a grip. Did we “ lose” The
Lovely Bones because some of its location shoot was done
in Pennsylvania? No, we didn’t. Weta Digital is the jewel
in the crown for New Zealand, because that is what lured
Avatar here, and it is what will bring other major
projects here in future. It is also what will fuel the
knowledge industry spin-offs in video gaming and other
related industries. And to repeat : Weta Digital was never
going to ‘lose’The Hobbit, where-ever it happened
to be shot. The alleged threat has been viewed as an
industrial relations conflict (and has been deliberately
framed as us “losing the production) because it has suited
the producers, their lobby group (Spada ) and the
politicians to do so. The mainstream media has been more
than happy to oblige.

Put it this way. If we “lose”
The Hobbit would that mean that the production would not be
putting in for any funds whatsoever from the Large Budget
Screen Production Grants Scheme? Hardly. I would expect New
Zealand will still be paying a sizeable sum to The
Hobbit under the LBSPGS, wherever it is shot. In fact,
it would be an interesting exercise to break down the ratio
of the production costs between (a) the location shoot (b)
pre-production and (c) post production, and the potential
LBSPGS claim for those last two components.

To the government’s relief though,
very little attention has been paid to the film production
incentives that New Zealand offers, which have ceased to be
globally competitive. New Zealand’s main incentive is the
LBSPGS which was created by Jim Anderton back when he was
Minister of Economic Development and the responsibility for
it has now devolved to his successor, Gerry Brownlee.
However, in a speech to a Film NZ networking function in May
2009, Brownlee made it clear that while the Key
government would keep the scheme, it would be at its current
rate:

Our competitors continue to work to
attract productions to their countries. So while we don't
want to engage in a ‘race to the bottom' within higher and
higher incentives the next step is to cultivate a regulatory
environment that makes it easy for filmmakers to come to New
Zealand, and film in our locations, use our facilities, and
hire our workers, and engage our talent
pool.

Note Brownlee’s priorities –
don’t increase the incentives, but make it easier for
foreign studios to hire our workers. Currently New Zealand
offers through the LBSPGS a 15% refund on the local spend by
foreign film productions. As I pointed out last week,
countries in Eastern Europe (and elsewhere) now offer far
more generous deals. Ironically, the government was warned
recently about the importance of film incentives to the
Hollywood executives now able to pick and choose where in
the world to base their projects – and that warning came
from Sir Peter Jackson himself,

In his July review of the Film Commission,
Jackson slammed the Treasury for its complacency. He cited a
recent report in which Treasury continued to rely on its own
2005 evaluation that ‘Very large budget films that come to
New Zealand usually did so for quality and creative reasons,
rather than economic reasons.’ Treasury’s belief,
Jackson maintained, was ‘simply untrue.’ Without the
LBSPGS, Jackson continued, “Universal would have insisted
King Kong be moved to Canada in the blink of an eye.
There’s nothing this country offers that justifies the
budget hit Universal would have taken by basing the film in
a country with no production incentives.”

The same logic
surely, still applies. It is hard to see why the Hollywood
studios making The Hobbit wouldn’t shift it to
Europe or North America, or Britain ‘ in the blink of an
eye’ if they thought they could get a better deal on
incentives. Yes, our exchange rate gives us a 30% edge on
the US dollar – far better than the 5% edge on offer in
say, Australia – but even that exchange rate advantage is
less than in the LOTR days. Jackson is the only factor still
keeping us competitive. The real political question is –
what is Brownlee now going to do about the uncompetitive 15%
that we have out there these days as a lure?

Last week, I
pointed out on Scoop that Serbia is
offering 15-25% rebates on local spend, and the Czech
Republic is offering 20%. Hungary is also offering 20%. In
addition, Jackson provided a long list of foreign film
production incentive schemes (they can be found on pages
68-69 of his Film Commission review) that exceed what New
Zealand has to offer. This recent Time magazine
article on the film industry in Hungary
(“Hooray for Hungary – Is Budapest the New Hollywood of
Europe?”) shows just how sophisticated some our
competition is getting.

For much of the past
week, the Jackson camp has been running a thin argument that it
couldn’t do a deal on The Hobbit because that would
set a precedent for the entire local film industry.
Supposedly, every aspect of union coverage agreed to on this
huge two film project would automatically carry over to
every small budget New Zealand film made by Taika Waititi,
by Gaylene Preston and by film-makers even further down the
food chain.

Supposedly, continuous employment with
Jackson’s Three Foot Seven company stretched over two
films for a period of years would be comparable under the
law, to the occasional week long shoots that characterise so
many New Zealand productions, even though it is only in that
hand-to-mouth context that the ‘ independent contractor’
status makes any sense. Call me cynical, but I don’t think
the makers of an elephantine project like The Hobbit
should be trying to hide behind this particular mouse.

If
Philippa Boyens doesn’t want the deal on The Hobbit
to become a binding precedent for a struggling local
industry… well duh. Write words to that effect into the
contracts for The Hobbit and ring fence the wages and
conditions. Newsflash: it is not unknown for court rulings
to be ring fenced with statements to the effect that no
precedent can be deemed to apply (or are to be inferred)
from the particular findings. At most, an agreement on wages
and conditions for The Hobbit would set an
aspirational precedent only – and the status quo could be
defended if any employee on The Hobbit wanted to be
treated as such on the next shoestring local production. A
compromise deal on wages and conditions for The
Hobbit might carry over automatically only if and when
the Film Commission gets around to greenlighting its next
$212 million film project. That may take a while.

If one
took the Boyens/Jackson arguments at face value – i.e. as
anything other than a bargaining tactic – one would have
to conclude that unions have little or no place in the film
industry, and that workers in that industry should be
content with whatever largesse their employers deem
appropriate, and bestow on them. Ironic really, that the
most cutting edge of our knowledge industries seems to be
insistent that its industrial relations should be conducted
on terms that hark back to the Victorian era. The deal on
residuals for instance, that Jackson is said to be offering
to non-Screen Actors Guild members may turn out to be as
generous as he says it is – but really, that is no
substitute for allowing workers to negotiate fair wages and
conditions. Industrial relations should not be run as a
charity. Whatever the benign intent, the residuals deal has
smacked of the box of vegetables left on the doorstep by the
feudal lord at Christmas time, for each of his faithful
serfs. Mind you, at the Wellington actors’ meeting in
particular, there seemed no shortage of people willing to
tug their forelocks in gratitude, or in fear.

The MGM sale

As mentioned, the
MGM sale is crucial to the outcome on The Hobbit, and
to the ability of the production to meet its self-imposed
deadline of being in theatres by December 2012. The
production cannot be formally greenlit until the deal is
concluded – and as I indicated in mid July Spyglass has
now emerged as the leading suitor, and letters of intent
have reportedly been exchanged. This is why pre-production
on The Hobbit has proceeded so confidently. MGM’s
latest debt repayment extension has been rolled over until
October 29.

However, the 11th hour advent of Carl Icahn seems to have
stymied the public announcement. Back in July, Icahn was
locked in an internal boardroom war with the other directors
of Lions Gate, a major art house company that makes the
Mad Men television series (it also made the film
Precious) in which he owns a 33% stake. Icahn’s
motivation back then was to block Lions Gate from bidding
seriously for MGM. Now however, he has jumped the fence and
has bought up some 10% of MGM debt and is – ostensibly –
trying to get MGM to merge with Lions Gate.

While no one
can predict Icahn’s ultimate game plan, the more
likely outcome would seem to be that the new owners of MGM
would have to buy him off. And surely, if you or I were Carl
Icahn, we might be tempted to angle for a premium for our
foregone share in the profits from The Hobbit and
from the next James Bond movie, in which MGM holds the ahem,
lion’s share. New Zealand should be regarding these
manoeuvres with trepidation. The mounting costs will be
making its 15% production incentive look scrawnier by the
day to the anxious bean counters in Hollywood.

Looking back over the past
fortnight, it has been extraordinary to see the
producers and their lobby group claiming to be bound by the
conditions that they have imposed on the work force in the
New Zealand film industry. In his review of the Film
Commission, Jackson was highly critical of the
producer-driven nature of our film industry. Not in this
instance, evidently.

As an aside, The Hobbit
furore has also been an interesting case study of how the
mainstream media has seemed content to be a passive conduit
for the P.R. statements of the celebrity players – whose
claims have largely been taken as read, no matter how self
serving. Only on the blogosphere has there been any attempt
at weighing the competing positions, or at getting behind
the posturing on both sides of the fence – notably by The Standard and also
I hope, by Scoop.

In passing, a special dinosaur award
for service to the anti-union cause though, has to be awarded to Rosemary McLeod,
who invoked the spectre of organized labour – the
boilermakers, cooks and stewards and watersiders were all
hauled back by her from the editorial grave – to intimate
that The Hobbit production and our tourism industry
were all now under threat from the combined might of
Jennifer Ward-Lealand and her army of dues-paying orcs. To
combat this menace, McLeod volunteered to be a scab for
Jackson, and bring her own packed lunch on set if need be.
Come to think of it…there may be a job going as stand-in
for those hobbits held captive by the Elf King, and who get
nailed into barrels and tossed in the river.

Once the
dust on this particular project has settled – and unions
are finally able to do what unions do elsewhere in the work
force – I don’t think the government’s film incentives
will be able to avoid critical scrutiny for much longer. As
things stand, Peter Jackson is carrying the government and
the film industry on his back. Most of the foreign film
projects coming here are despite the level of our production
incentives, and not because of them – and the bulk of that
traffic these days is post-production activity bound for
Weta. Film NZ might be able to prove me wrong, but New
Zealand does not seem to be getting the kind of location
shoots it used to attract only a few short years ago.

If
that situation is ever going to turn around, Jackson
deserves a break. Gerry Brownlee and Bill English need to
raise the LBSPGS to 20%, immediately. The Greens – who
earlier this came up with the moronic idea of capping the
scheme – need to be told that New Zealand will receive
back far more in local spending on wages and downstream
services from the LBSPGS than it pays out on film
incentives. The LBSPGS is a virtuous grant scheme paid out
after the money has been spent here, and not a shonky
tax dodge that raids the revenue beforehand.

So far
though, Treasury has been able to maintain its ideological
hostility to such incentives, and the government has been
able to dodge the political fallout – mainly because the
mainstream media has been happy to ensure the union demands
on The Hobbit keep copping the flak. Genuine
transparency is needed. If Warners do finally choose to
shift the location shoot for The Hobbit out of New
Zealand, we need to be aware for the true rationale behind
that decision – union organizing, or the larger incentives
now available in Europe and elsewhere? And what sums, if
any, will The Hobbit production still expect to take
from the LBSPGS?

Routinely, we have been left in the dark
on such issues, mainly because the media doesn’t ask, and
the film-makers and politicians have reasons of their own to
fudge the details that they release to the public. Eight
years on, we still do not know the net benefit of the tax
incentives that we paid for LOTR. Essentially, we have come
no distance at all from what I wrote in 2003, when this stuff
already seemed like ancient history :

In
the January [2003 Onfilm] issue, Jackson alleged that the
$200 million figure routinely cited for the tax breaks is a
“ludicrous” and “irresponsible figure” that was
“published once” and its truth never subsequently
analysed. Furthermore: “Cullen knows it’s not true and
yet he’s been capitalising on that figure.” The
government has allowed such nonsense to be perpetuated,
Jackson believes, to try to give tax breaks a bad name.
According to him, the tax breaks were less than the $110
million paid in PAYE tax by the production.

A
highly frustrating situation for the taxpayer, who might
feel like tossing both of them into the cracks of Mt Doom.
We have Jackson saying that the tax breaks were really small
– but he’s not “allowed” to be specific – and
Cullen suggesting that they were really big, but he can’t
be specific, either, and certainly not to the taxpayers
footing the bill. At the premiere of Return of the King, it
was left to the ever-gracious Viggo Mortensen to thank the
taxpayers of New Zealand for making the film
possible.

For years [the public] has sought
clarity on this point. First, we had to establish that the
tax breaks existed, then figure out their likely size and
how the deals worked. The figure of circa $200 million –
roughly one third of a $600 million budget – was not
plucked from the air. It was the IRD’s own shorthand
estimate, stated in interviews with them and based on the
company tax rate. We may never know the exact figure,
although $217 million has been cited to me by government
sources. My final attempt in mid 2003 to prise the net
situation regarding LOTR from Economic Development Minister
Jim Anderton hit the usual stonewall: “We don’t
know.”

Such declarations of ignorance seem
incredible. How, then, does the government devise rational
policy in this area?

Answer: it
doesn’t. It just crosses its fingers, thanks God for Peter
Jackson, and leaves the fate of the industry to the winds of
chance.

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